Divis Laboratories - Target Price of Rs. 1233 - Dolat Capital

We expect the Custom Synthesis (CS) & API division to grow by 20% CAGR over FY13-15E, aided by ramp up in Vizag SEZ operations. The FDA approval for the location is expected in H2FY14E.This facility is currently running at 45% capacity utilization. DSN SEZ is anticipated to achieve 85% capacity post successful FDA approval and shall contribute meaningfully in FY14E.

- The company's inherent chemistry skills positions it well as a strong player in custom synthesis exports and on another hand a dominant API supplier to the innovators with relentless focus on generating high yields.

- Divi's has kept itself from entering the formulation business, which adds comfort to its clients.

- The company has created an extensive portfolio of carotenoids like Astaxanthin, Canathaxanthin, Apocarotenal. We expect the segment sales to reach Rs. 2.5bn in FY15E and contribute 7% of the total sales aided by gradual volume off-take.

- We expect 22% revenue growth over FY13-15E, while Debt free balance sheet and controlled Capex enables Divis to generate healthy cash flows.

- Increased power tariffs as a result of power shortage in the state continues to weigh on margin expansion and is expected to remain a near term concern, However we anticipate ramp up in its new Vizag facility post FDA approval to reflect benefits of operating leverage in FY14E.

- At CMP of 960, the stock trades at 15.7x FY14E and 13.2x FY15E earnings. Recommend BUY, with target price of 1233 (17x FY15E EPS)

Source : Equity Bulls

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